Private credit’s expanding opportunity set

Chris Martin, Institutional Portfolio Manager for Alternatives, explores a broader private credit toolkit beyond a core allocation to U.S. direct lending, with portfolio fit, liquidity and transparency in focus.

Investing in a more uncertain world

Investors are navigating a more uncertain market environment. Geopolitics, growth, inflation, central bank policy, market dynamics and more are making portfolio positioning more complex. Against this backdrop, investors are reassessing how they build diversified and resilient portfolios, manage liquidity needs, and identify appropriate new sources of return as they look to complement core U.S. direct lending allocations or diversify away from them.

While long-term goals remain, new information can still prompt smaller changes at the margin to better position portfolios – whether in response to a new world order or to smaller opportunities and risks that may emerge along the way. Sometimes these changes are driven by fast-moving events; at other times catalysts can be slower-burning structural shifts that can get “lost in the shuffle” but they can still have durability and impact for return potential.

Looking beyond U.S. direct lending

Private credit is still often associated with U.S. direct lending, a core allocation for many investors with established private credit programmes. In practice, however, the private credit asset class is much wider – an umbrella spanning stressed and distressed credit, real estate, private securitised assets, asset-backed finance and EMD.

Investors are increasingly using this wider universe to complement or diversify core direct lending exposures. Recent concerns around business development company (BDC) redemptions have sharpened focus on liquidity and asset-liability matching, but the broader question remains: where could the next marginal private credit dollar go beyond direct lending?

That breadth of opportunity matters because different private credit assets can have different portfolio characteristics. Some are still relatively early in their development, with less competition and more scope for managers to influence outcomes. Others may also offer more idiosyncratic sources of diversification across industries, geographies and restructuring situations. What these private credit assets have in common is that while they may not be complete substitutes for direct lending, in the right circumstances they can still be additive to portfolio construction.

Regional opportunities in European credit and EMD

European credit markets have absorbed a series of shocks in recent years, from weaker post-Covid growth relative to the U.S. to higher energy prices following Russia’s invasion of Ukraine. More recently, renewed energy price pressure linked to the U.S. war with Iran has added to those challenges. These cumulative pressures have been particularly acute for middle-market companies, where close to EUR45 billion of debt needs to be refinanced annually this year and next, often at much higher rates¹.

As companies adapt to a more challenging operating environment, their management teams are being forced to find more creative ways to finance and refinance their businesses. For sophisticated investors, however, that may create opportunities to provide capital where it is needed and – crucially – seek appropriate compensation for doing so.

EMD is another compelling narrative. At around USD30 trillion, the EM local market is roughly similar in size to the U.S. Treasury market, with multiple ways to invest across currencies, sovereigns and corporates, and via local and hard currencies. This combination of dispersion, depth and return potential makes local expertise and policy insight especially important.

Within EM, Latin America appears to be relatively well positioned, while EM illiquid loans could offer a potential parallel to the growth in U.S. direct lending following the 2008 Global Financial Crisis. For now, our EMD research shows that banks still account for 90% or more of lending in EM, but early signs of a shift toward asset manager lending could create a growing opportunity set.

The importance of “knowing what you own”

As investors look beyond a traditionally core holding of U.S. direct lending and consider moving into less familiar areas of private credit, “knowing what you own” becomes even more important. That means a strong manager-investor partnership, supported by clear two-way communication, to understand not only the portfolio itself, but the manager’s process and people, what risks are being assumed, and how they are navigating and repositioning as market conditions change.

Liquidity is also central to “knowing what you own.” Private credit liquidity can range from daily liquid vehicles through to drawdown funds. In some cases, income characteristics can affect the duration of capital – as a case in point, EM illiquid loans are reasonably short-duration loans paying regular quarterly coupons. Whatever the private credit asset in question, the key for investors is to match as closely as possible the liquidity of the underlying assets with the terms or structure of the fund as a whole – where that match is good, credit can be a portfolio construction advantage rather than a liability.

Looking ahead: more choice, but with discipline too

As base rates have risen since 2022, the premium for allocating to private direct lending versus public market loan counterparts has compressed. That narrowing in spreads is encouraging investors to consider a broader private credit opportunity set spanning asset type, structure, geography, sector, industry and situation.

Fund structures are also evolving, from actively managed fixed income ETFs to interval funds. These structures may broaden access, but product development should not lead the investment case.

Together, these developments can offer investors distinct but complementary strategies, supporting diversification while keeping liquidity in focus. Ultimately, as investors consider private credit opportunities beyond U.S. direct lending, portfolio fit, liquidity discipline and manager transparency should continue to come first.

^{1 RBC GAM, as at 24 February 2026.}